May

2

 Lest we make the same mistake as everyone else, let us look at prices as signals rather than looking at past seasonally adjusted random numbers about announcements, anecdotes, et al. Note the 15% drop in last 2 weeks in gold and most commodities, and the comparable rise in the dollar, and consider whether the markets see less inflation or more inflation ahead, with all the finger pointing, imprecations, and critiques of the putative inflationary bias of recent activities.

Let us also look at the slope of the yield curve and calculate expectations going forward since 1960 or so when the curve was  upward like this, the same way that doomsdayists would look at downward sloping to predict recessions, (as if that was bearish for stocks).

Many forms of dynamic behavior can be modeled by difference equations that reach a fixed point. I hypothesized that after a market hits a fixed point, where the change in the last 10 days is less than 1/3 of the moves in the previous 10 or 20 days, that a new equation might develop with trend following working much better. After testing this with various parameters I concluded that there is not much to it, except that the market doesn't like small moves, i.e. the old idea that rates of return are highest when risk is highest gets one more instantiation.

We had an interesting talk last night by Ed Hudgins of Atlas Society about measuring economic freedom. They have this down to a pretty rarefied state now, and consider most things that people might consider, like property rights, service rates, regulation, corruption, and time and ease of starting business. They conclude that freedom is responsible for everything good from gdp to growth to peace to longevity. However, like The Stages of Growth, all the stages and attributes are retrospective, tied in with past gdp, or expectations for the future thereof, and non-predictive. Their work in trying to measure economic freedom by state might be of investor interest, and things similar to Laffer's efforts in this field might have investment merit. Hutchins himself wants now to measure an index of individuality cross country wise and this brings to mind Sam Otis's remark in Johnny Tremaine, well worth reading for any kid or adult, that the simple reason for giving up life and liberty was " the ability to stand tall ". I believe this the key to economic prosperity also.


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  1. michael bonderer on May 2, 2008 9:22 am

    This from Sacramento on May Day no less: Schwarzenegger aides exploring possible tax hikes As the state's budget picture worsens, business groups are being asked what levies might be acceptable. The governor publicly continues to oppose new taxes. By Evan Halper, Los Angeles Times Staff Writer 11:19 PM PDT, May 1, 2008 SACRAMENTO — As Gov. Arnold Schwarzenegger continues to say publicly that he will hold the line against new taxes, his administration is laying the groundwork for a possible tax increase. Administration officials are soliciting advice from business groups and other special interests on how to propose billions of dollars in tax hikes that could help close a budget shortfall the governor now says is as large as $20 billion. Schwarzenegger's staff is exploring a range of options, including sales taxes on lawyer and accountant services, on high-end services such as golf lessons and personal-trainer sessions, and on takeout coffee and other prepared foods that are not taxed now. The administration's goal, participants in the discussions say, is to gather support for new taxes from a broad spectrum of the business lobby, giving the Legislature's Republicans political cover to break their pledges never to vote for them. Several lobbyists and state officials involved in the meetings agreed to talk about them on condition of anonymity, for fear of antagonizing the administration. They say talks have heated up as the governor prepares his revised budget plan for release May 14. That plan will reveal how large the deficit has grown in recent months — a number that state accountants are still calculating as they sort through April tax receipts. Schwarzenegger's staff is advising the interest groups that the governor is prepared to call for a tax increase if California's finances have darkened considerably. Administration press secretary Aaron McLear would not comment on what had been discussed in the meetings. "The governor does not support raising taxes," McLear said. "I can't comment on private meetings and who we have talked to internally." McLear said: "Everybody knows the deficit will be bigger than it was in January. . . . We're preparing for every different scenario." At the meetings, according to those who have attended, administration officials are asking interest groups which taxes might be acceptable — and what the administration should demand in return from the Democrats who control the Legislature. The administration is studying several ways to tax services: narrowly, on luxuries such as personal trainer services and golf lessons, or more broadly. A broader levy that might affect all entertainment purchases — including movie, theater and sporting event tickets, amusement park admissions, ski lift passes and greens fees — could raise about $1 billion, according to state tax officials. Taxing the services of lawyers, accountants, mechanics, landscapers, hairstylists and every other service professional in the state could generate more than $8 billion, they say. Other possibilities the administration is studying are a tax on certain prepared foods, such as a cup of coffee to go, and on Internet software purchases. Also on the table are limits on the deductions that businesses can claim on losses. Before the governor raises taxes, should he go that route, he is expected to demand legislative support for spending restraints that would force the state to create a rainy-day fund with revenue windfalls it receives during good economic times. Business leaders have long pushed for such measures, arguing that they would curb runaway spending and bring some stability to state finances. Business leaders are also lobbying the administration to use potential tax hikes as leverage for policy changes unrelated to state spending, such as changing workplace rules to allow employers to dictate when workers can take breaks. Political analysts were not surprised to learn that the governor was considering tax hikes. "He used to say we can have a gold standard of public service without paying more if we just wring the waste out of government," said Bruce Cain, a political science professor at UC Berkeley. "I think he now understands that is a myth." The budget blueprint the governor presented in January gave a glimpse of how state programs would be affected without new revenues. He proposed school cuts that would result in thousands of teacher layoffs, closing dozens of state parks and substantial cuts in healthcare programs for the poor. Since that time, tax receipts have plunged by billions more, meaning that the cuts would have to be deeper if the governor and lawmakers did not find new revenue. The governor continues to say that lawmakers may be able to find alternatives to new taxes, such as leasing the state lottery to a private firm. The lottery "could bring us in billions and billions of dollars," Schwarzenegger said in a KPCC-FM (89.3) radio interview with Times columnist Patt Morrison, to be broadcast today. "There's areas like that. We just have to get, you know, creative about it." Many fiscal analysts are skeptical. They say that squeezing multiple billions out of the lottery would require voters to sign off on changes to the state Constitution, something that could not occur until November. By then, the state could be in a cash crisis. And privatization of the lottery is opposed by gambling interests rich enough to fight it with a well-financed campaign. The governor's anti-tax rhetoric, meanwhile, has softened considerably. He is saying publicly that he is open to looking at eliminating existing tax breaks, or "loopholes," that don't significantly boost the economy. He says the state cannot balance the budget on cuts alone because the effect on services would be too severe. And he is warning that the deficit is growing so big that every option for balancing the budget must be considered. Schwarzenegger's declaration that the deficit may be growing to insurmountable heights — the $20-billion figure he threw out earlier this week seemed inflated to even the most pessimistic forecasters — signaled to many in Sacramento that he was girding to endorse taxes. The rhetoric of his business allies is also starting to shift. Loren Kaye, president of the California Foundation for Commerce and Education, a think tank affiliated with the California Chamber of Commerce, wrote recently in the Sacramento Bee that a temporary tax hike may be appropriate — if the Legislature supports spending restraints that would keep the state from ever again spending more than it brings in. Bill Hauck, president of the California Business Roundtable, said his group was also looking for a long-term solution. "The magnitude of the problem is going to dictate the solution," he said. "I think my members' overall view is the state of California has got to get its fiscal house in order."

  2. Greg Vinately on May 2, 2008 10:25 am

    Where's Lon Evans and his bearish rampant calls for the S&P500 to fall to 1200? Maybe he got tired of fighting against the secular updrift?

  3. Anatoly Veltman on May 2, 2008 11:13 am

    Greg, I don't know where Lon is, but I'm the one who always seeks appropriate timely analysis. Does anyone have a particular buy or sell recommendation here, at 1425? Feel free to offer your analysis on any other market: particularly EUR, JPY, Crude, Gold or 2-30Y rates.

  4. steve leslie on May 2, 2008 2:57 pm

    I have always felt that markets ultimately get it right. It may take it some time to get things organized but it figures things out. The more things change the more they remain the same. One word, Benjamin: "Bonds"… I was always told look to the bond market, where the really smart people work. And as you have so expertly noticed, there is the yield curve. There is significance to this in my view. I do not follow commodities but I understand wheat has dropped 40% since February. As an addendum to the bond market look, to the junk bond spread which has been declining for several months now. Spot gold has dropped from $1000 to $850. Civil jobs hit an all-time high and unemployment is a very reasonable 5.1 percent. Plus if you look at the last few quarters the GDP numbers have have not gone into recession by definition. These numbers were reported on Kudlow and Co.'s Friday evening show. sl.

  5. michael bonderer on May 3, 2008 11:20 am

    Woody 'Spider' Brown Surfer and Designer 1912-2008

    Record-breaking aviator who became a legendary surfer

    By Phil Davison Published: May 3 2008 03:00 | Last updated: May 3 2008 03:00

    As a 15-year-old truant from a posh school in New York, the would-be pilot Woodbridge Brown washed Charles Lindbergh's aeroplane, Spirit of Saint Louis, and waved his hero off from Roosevelt Field, Long Island, on his historic 1927 flight to Paris. The teenager had spurned his wealthy family home, slept on cold hangar floors and mopped up oil leaks just to be close to the era's romantic new flying aces.It was the start of a lifelong fascination with wind and water that was to turn Woody Brown, who has died at the age of 96, into a record-breaking aviator, sailor and designer who built the first modern catamaran. Above all, he will be remembered as a legendary surfer. He said of the surf in Hawaii, where he lived for more than 60 years […]

    Read the rest here: 

    http://www.ft.com/cms/s/0/97f3bdf6-18aa-11dd-8c92-0000779fd2ac.html

  6. Gary Rogan on May 6, 2008 9:46 pm

    I bet the clearest indicators of economic freedom are net inflows (or outflows) of capital when properly compensated for nominal interest rate differentials.

  7. Arman Agdaian on May 8, 2008 2:46 am

    Dear Victor, I would love to tell you my story. I read your book about eight years ago and you changed my life, your stories changed my life and the way I look at the markets. I went broke at least three times until 2007 when I really broke out, started two accounts, one for $4,000 — today's value approx $300,000 — and other for $15,000 and today worth $371,000. I owe majority of my thought process to you and others (Soros, Jesse Livermore). Thank you so much.

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